Suppose that the $ for $ spot exchange rate is 2:1, the 90day forward exchange rate is F = 2:156, the 180day forward exchange rate is F = 2:118 (a) What are the arbitrage opportunities when a 180day European call option to purchase $1 for K = $2:07 costs C = $0:02? (b) What are the arbitrage oppportunities when a 90day European put option to sell $1 for K = $2:2 costs P = $:02?

International Financial Management
14th Edition
ISBN:9780357130698
Author:Madura
Publisher:Madura
Chapter5: Currency Derivatives
Section: Chapter Questions
Problem 28QA
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Suppose that the $ for $ spot exchange rate is 2:1, the 90day forward exchange rate is F = 2:156, the 180day forward exchange rate is F = 2:118 (a) What are the arbitrage opportunities when a 180day European call option to purchase $1 for K = $2:07 costs C = $0:02? (b) What are the arbitrage oppportunities when a 90day European put option to sell $1 for K = $2:2 costs P = $:02?

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